The results are based on a risk-based sample of the audits undertaken by ‘Tier 1’ audit firms, which the FRC defines as the firms with the largest share of the UK PIE market, and are set out in more detail in each firm’s report (also published today).

Of the audits inspected this year, 74% were categorised as good or requiring limited improvements. There has been a trend of general improvement over the last 5 years from the largest four firms (Deloitte 94%, EY 76%, KPMG 89% and PwC 76%). Audit quality for the FTSE 350 has also improved, up from 81% to 87% year on year.

However, there is a widened gap between the largest four firms and the other Tier 1 firms, BDO and Forvis Mazars. The audit results for BDO have declined significantly from 69% to 38% year on year, while Forvis Mazars’ results also declined from 56% to 44%. While inspections are based on a risk-based sample, and should not be extrapolated to all of the audits undertaken by both firms, the results do not meet the FRC’s expectations.

Given their strategic importance to the audit market, the regulator has said both firms must urgently address the causes of these declines and undertake significant audit quality improvement plans which will be closely monitored.

The FRC recognises that audit quality improvements can take time, and through its holistic supervisory approach, the regulator will continue to robustly challenge and actively monitor audit firms on key drivers of audit quality.

The FRC’s executive director of supervision, Sarah Rapson, said: “The FRC welcomes the audit quality improvement at the largest four audit firms, particularly the improvement in FTSE 350 audits, which are some of the most complex and systematically important UK audits.

“This progress demonstrates the considerable efforts to improve audit quality firms have made over a number of years.

“Disappointingly, BDO and Forvis Mazars’ performance has fallen significantly below our expectations. Both firms are strategically important to the UK audit market and the wider UK economy, so it is vital that they deliver on their agreed improvement plans. The FRC’s supervisory work with these two firms will continue to focus on these improvements.”